I

103D CONGRESS

1ST SESSION H. R. 578

To provide for recovery of costs of supervision and regulation of investment

advisers and their activities, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 26, 1993

Mr. BOUCHER (for himself, Mr. MARKEY, Mr. DINGELL, Mr. FIELDS of

Texas, Mr. COOPER, Mr. WYDEN, Mr. LEHMAN, and Mr. SYNAR) introduced the following bill; which was referred to the Committee on Energy

and Commerce

A BILL

To provide for recovery of costs of supervision and regulation

of investment advisers and their activities, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Investment Adviser

5 Regulatory Enhancement and Disclosure Act of 1993’’.
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1 SEC. 2. ADDITIONAL RESOURCES FOR INVESTMENT AD2 VISER SUPERVISION.

3 (a) AMENDMENT.—The Investment Advisers Act of

4 1940 (15 U.S.C. 80b–1 et seq.) is amended by inserting

5 after section 203 the following new section:

6 ‘‘FEES FOR REGISTRANTS AND APPLICANTS

7 ‘‘SEC. 203A. (a) IN GENERAL.—The Commission is

8 authorized, in accordance with this section, to collect fees

9 to recover the costs of registration, supervision, and regu10 lation of investment advisers and their activities. Such fees

11 shall be collected, and shall be available, only to the extent

12 provided in advance in appropriations Acts. No appropria13 tion Act may authorize fees to be collected under this sec14 tion during any fiscal year unless the amount appropriated

15 by such Act for such costs for such fiscal year equals or

16 exceeds the aggregate amount that may reasonably be ex17 pected to be collected by such fees. Such fees shall be de18 posited as an offsetting collection to the Commission’s ap19 propriation and may remain available for such purposes

20 for the succeeding fiscal year. The costs covered by such

21 fees shall be limited to the costs of Commission expenses

22 for registration, examinations, and surveys of persons reg23 istered or required to register under this Act.

24 ‘‘(b) TIME FOR PAYMENT.—

25 ‘‘(1) NEW REGISTRANTS.—At the time of filing

26 an application for registration under this title, the
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1 applicant shall pay to the Commission the fee speci2 fied in subsection (c). No part of such fee shall be

3 refunded to the applicant. The filing of an applica4 tion for registration under this title shall not be

5 deemed to have occurred unless the application is ac6 companied by the fee required under this section.

7 ‘‘(2) ONGOING REGISTRANTS.—Each invest8 ment adviser whose registration is effective on the

9 last day of its fiscal year shall pay to the Commis10 sion the fee specified in subsection (c). Such pay11 ment shall be made not later than 90 days after the

12 end of its fiscal year, or at such other time as the

13 Commission, by rule, shall determine, unless its reg14 istration has been withdrawn, canceled, or revoked

15 prior to that date. No part of such fee shall be re16 funded to the investment adviser.

17 ‘‘(c) COST-BASED SCHEDULE OF FEES.—For any

18 fiscal year for which fees are authorized to be collected

19 by an appropriation Act, the amount of fees due from in20 vestment advisers in accordance with paragraphs (1) and

21 (2) of subsection (b) shall be determined according to the

22 following schedule:

‘‘Assets under management Fee due:

Less than $10,000,000 ............................................................ $300

$10,000,000 or more, but less than $25,000,000 ................... $500

$25,000,000 or more, but less than $50,000,000 ................... $1,000

$50,000,000 or more, but less than $100,000,000 ................. $2,500

$100,000,000 or more, but less than $250,000,000 ............... $4,000

$250,000,000 or more, but less than $500,000,000 ............... $5,000
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‘‘Assets under management Fee due:

$500,000,000 or more ............................................................. $7,000.

1 ‘‘(d) SUSPENSION FOR FAILURE TO PAY.—The Com2 mission, by order, may suspend the registration of any in3 vestment adviser if it finds, after notice, that such invest4 ment adviser has failed to pay when due any fee required

5 by this section. The Commission shall reinstate such reg6 istration upon payment of the fee (and any penalty due),

7 if such suspension was based solely on the failure to pay

8 the fee.

9 ‘‘(e) RULEMAKING.—The Commission may adopt

10 such rules as are necessary to carry out this section.

11 ‘‘(f) DEFINITION OF ASSETS UNDER MANAGE12 MENT.—As used in this section, the term ‘assets under

13 management’ means the client assets with respect to which

14 an investment adviser provides continuous and regular su15 pervisory or management services.’’.

16 (b) EFFECTIVE DATE.—This section shall become ef17 fective upon the adoption by the Commission of imple18 menting rules, under section 203A(f) of the Investment

19 Advisers Act of 1940, as added by subsection (a).

20 SEC. 3. EXAMINATIONS AND SURVEYS.

21 The Investment Advisers Act of 1940 is amended by

22 inserting after section 222 (15 U.S.C. 80b–22) the follow23 ing new section:
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1 ‘‘EXAMINATIONS AND SURVEYS

2 ‘‘SEC. 223. (a) PERIODIC EXAMINATIONS.—The

3 Commission shall establish and periodically revise a sched4 ule for the regular examination of investment advisers.

5 Such schedule shall provide for more frequent examina6 tions of certain investment advisers based on factors that

7 the Commission determines increase the need for examina8 tion of those investment advisers, which shall include (at

9 a minimum) each of the following:

10 ‘‘(1) the frequency of customer complaints;

11 ‘‘(2) the risks associated with newly registered

12 investment advisers;

13 ‘‘(3) custody of funds and the authority to exer14 cise investment discretion;

15 ‘‘(4) the existence of deficiencies detected dur16 ing an examination under this title that may con17 tinue to present high risks to clients; and

18 ‘‘(5) the receipt of commissions for the sale of

19 investments recommended to clients.

20 ‘‘(b) SURVEYS OF UNREGISTERED PERSONS.—The

21 Commission shall, within 3 years after the date of enact22 ment of this section and periodically thereafter, provide

23 for the conduct of a survey to determine the extent of,

24 and reasons for, the failure of persons to register as re25 quired by this Act. The Commission shall, on the basis
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1 of such survey results, establish objectives for the reduc2 tion or elimination of such failures and shall include in

3 annual reports to Congress (under section 23(b) of the

4 Securities Exchange Act of 1934) submitted after comple5 tion of the first survey, a statement of such objectives,

6 an evaluation of the success in attaining those objectives

7 during the preceding year, and such recommendations as

8 the Commission considers appropriate to assist in the at9 tainment of those objectives. If the survey identifies any

10 pattern of noncompliance with the registration require11 ments of the title and the rules thereunder, the Commis12 sion’s objectives shall include such rulemaking proceedings

13 as may be required to correct such noncompliance.

14 ‘‘(c) PROVISIONS NOT LIMITATION.—The provisions

15 of this section shall not be construed to limit the authority

16 of the Commission to prescribe rules under this Act or

17 to conduct an examination or investigation at any time

18 or to institute proceedings under this title or any other

19 title.’’.

20 SEC. 4. DESIGNATION OF SELF-REGULATORY ORGANIZA21 TIONS.

22 The Investment Advisers Act of 1940 (15 U.S.C.

23 80b–1 et seq.) is amended by inserting after section 223

24 (as added by section 3 of this Act) the following new sec25 tion:
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1 ‘‘DESIGNATION OF SELF-REGULATORY ORGANIZATIONS

2 ‘‘SEC. 224. (a) DESIGNATION TO CONDUCT EXAMI3 NATIONS.—The Commission, by rule, consistent with the

4 public interest, the protection of investors, and the pur5 poses of this title, may designate one or more self-regu6 latory organizations registered with the Commission under

7 sections 6 or 15A of the Securities Exchange Act of 1934,

8 to conduct periodic examinations of its members and affili9 ates of members that are registered or required to register

10 under this title to determine compliance with applicable

11 provisions of this title and the rules and regulations there12 under. Such rules shall specify the minimum scope and

13 frequency for such examinations and shall, to the extent

14 consistent with the protection of investors, be designed to

15 avoid unnecessary regulatory duplication or undue regu16 latory burdens. Such self-regulatory organization may dis17 cipline such members and affiliates of members for viola18 tions of the applicable provisions of this title and the rules

19 and regulations thereunder pursuant to the standards and

20 procedures set forth in sections 6, 15A, and 19 of the Se21 curities Exchange Act of 1934. The penalties imposed by

22 a self-regulatory organization for violations of this title

23 shall not exceed those contained in subsections (e), (f),

24 and (i) of section 203.
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1 ‘‘(b) LIMITATION.—The Commission shall not exer2 cise the designation authority contained in subsection (a)

3 for members or affiliates of members if the primary busi4 ness of the member or its affiliates is investment advisory

5 activities. The Commission, by rule, may establish criteria

6 for defining the term ‘primary business’.

7 ‘‘(c) AUTHORITY TO IMPOSE FEES.—

8 ‘‘(1) IN GENERAL.—Any self-regulatory organi9 zation designated by the Commission to perform the

10 examinations specified in subsection (a) shall have

11 the authority to collect fees in accordance with this

12 subsection.

13 ‘‘(2) LIMITATION.—The total fee paid by a reg14 istered investment adviser under this subsection

15 shall not exceed an amount determined in accord16 ance with rules prescribed by the Commission. Such

17 rules shall require that the fees collected by a self18 regulatory organization under this subsection—

19 ‘‘(A) cover only the costs of the self-regu20 latory organization’s expenses for examinations

21 conducted pursuant to subsection (a);

22 ‘‘(B) as to any investment adviser, bear a

23 reasonable relationship to the costs of conduct24 ing an examination of that adviser pursuant to

25 subsection (a); and
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1 ‘‘(C) not exceed such portion of the fee au2 thorized under section 203A as the Commission

3 determines is allocable to the Commission’s ex4 penses for conducting such an examination.

5 ‘‘(3) REDUCTION OF SECTION 203A FEES.—The

6 amount of any fee that a registered investment ad7 viser is required to pay under section 203A with re8 spect to any fiscal year shall be reduced by the

9 amount paid to a self-regulatory organization in ac10 cordance with this subsection with respect to such

11 fiscal year.

12 ‘‘(d) EFFECTIVE DATE OF RULE.—A rule prescribed

13 by the Commission under this section shall not be effective

14 until 90 days after the date on which the Commission sub15 mits to each House of Congress a report—

16 ‘‘(1) containing the text of the proposed rule

17 and the reasons therefor;

18 ‘‘(2) describing the procedures to be used to co19 ordinate the collection of fees by the Commission

20 under section 203A and by a self-regulatory organi21 zation under the rule; and

22 ‘‘(3) containing such other information as may

23 be necessary to describe the implementation and en24 forcement of the rule.
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1 ‘‘(e) DEFINITION.—For purposes of this section, the

2 term ‘affiliate’ shall mean any person directly or indirectly

3 controlling, controlled by, or under common control with

4 a member.’’.

5 SEC. 5. SUITABILITY AND OTHER ADVISER OBLIGATIONS.

6 (a) AMENDMENT.—Section 206 of the Investment

7 Advisers Act of 1940 (15 U.S.C. 80b–6) is amended to

8 read as follows:

9 ‘‘PROHIBITED TRANSACTIONS BY INVESTMENT ADVISERS

10 ‘‘SEC. 206. (a) PROHIBITED CONDUCT.—It shall be

11 unlawful for any investment adviser or any person associ12 ated with an investment adviser, by use of the mails or

13 any means or instrumentality of interstate commerce, di14 rectly or indirectly—

15 ‘‘(1) to employ any device, scheme, or artifice to

16 defraud any client or prospective client;

17 ‘‘(2) to engage in any transaction, practice, or

18 course of business which operates as a fraud or de19 ceit upon any client or prospective client;

20 ‘‘(3) acting as principal for his own account,

21 knowingly to sell any security to or purchase any se22 curity from a client, or acting as broker for a person

23 other than such client, knowingly to effect any sale

24 or purchase of any security for the account of such

25 client, without disclosing to such client in writing be26 fore the completion of such transaction the capacity
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1 in which he is acting and obtaining the consent of

2 the client to such transaction;

3 ‘‘(4) to engage in any act, practice, or course of

4 business which is fraudulent, deceptive, or manipula5 tive;

6 ‘‘(5) to provide investment advice to any client,

7 other than in connection with impersonal advisory

8 services, unless the adviser—

9 ‘‘(A) prior to providing any investment ad10 vice, and as appropriate thereafter, makes a

11 reasonable inquiry into the client’s financial sit12 uation, investment experience, and investment

13 objectives;

14 ‘‘(B) reasonably determines that the in15 vestment advice is suitable for the client; and

16 ‘‘(C) maintains reasonable records, in ac17 cordance with such rules as the Commission

18 shall prescribe, of the information obtained

19 from the inquiries the adviser made in comply20 ing with this paragraph; or

21 ‘‘(6) to guarantee a client that a specific result

22 will be achieved as a result of the investment advi23 sory services.

24 ‘‘(b) EXEMPTIONS AND SPECIAL RULES.—
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1 ‘‘(1) EXEMPTION.—The prohibitions of sub2 section (a)(3) shall not apply to any transaction with

3 a customer of a broker or dealer if such broker or

4 dealer is not acting as an investment adviser in rela5 tion to such transaction.

6 ‘‘(2) AUTHORITY TO DEFINE AND PRE7 SCRIBE.—The Commission shall, for the purposes of

8 subsection (a)(4), by rules define, and prescribe

9 means reasonably designed to prevent, such acts,

10 practices, and courses of business as are fraudulent,

11 deceptive, or manipulative.

12 ‘‘(3) DEFINITION OF IMPERSONAL ADVISORY

13 SERVICES.—As used in subsection (a)(5), the term

14 ‘impersonal advisory services’ means any investment

15 advisory services provided—

16 ‘‘(A) by means of written material or oral

17 statements which do not purport to meet the

18 objectives or needs of specific individuals or ac19 counts;

20 ‘‘(B) through the issuance of statistical in21 formation containing no expression of opinion

22 as to the investment merits of a particular secu23 rity; or

24 ‘‘(C) by any combination of the foregoing

25 services.’’.
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1 (b) RULEMAKING REQUIRED.—The Commission shall

2 prescribe rules for purposes of paragraph (5)(C) of section

3 206(a) of the Investment Advisers Act of 1940 (as added

4 by subsection (a) of this section) within one year after the

5 date of enactment of this Act.

6 SEC. 6. ADDITIONAL DISCLOSURE OBLIGATIONS OF IN7 VESTMENT ADVISERS.

8 (a) ADDITIONAL OBLIGATIONS.—Section 204 of the

9 Investment Advisers Act of 1940 (15 U.S.C. 80b–4) is

10 amended—

11 (1) by striking the heading of such section and

12 inserting the following:

13 ‘‘PERIODIC REPORTS AND OTHER DISCLOSURE

14 REQUIREMENTS’’;

15 (2) by inserting ‘‘(a) PERIODIC AND OTHER

16 REPORTS.—’’ after ‘‘SEC. 204.’’; and

17 (3) by adding at the end the following new sub18 sections:

19 ‘‘(b) BROCHURE REQUIRED.—

20 ‘‘(1) IN GENERAL.—Each person registered

21 under section 203 of this title shall disseminate to

22 each client or prospective client a document disclos23 ing material facts concerning matters listed in para24 graphs (2) and (3) and such other matters as the

25 Commission shall prescribe. In order to provide for

26 timely and effective disclosure of such facts and
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1 matters to clients, the Commission shall by rule pre2 scribe the format of the document and the timing of

3 its dissemination.

4 ‘‘(2) CONTENTS OF BROCHURE.—The document

5 required by paragraph (1) shall include information

6 concerning—

7 ‘‘(A) the education and business back8 ground of such person and of any associated

9 person providing significant investment advisory

10 services to the client,

11 ‘‘(B) compensation arrangements between

12 the client and the investment adviser,

13 ‘‘(C) the nature of services offered,

14 ‘‘(D) business practices,

15 ‘‘(E) methods for obtaining information on

16 the disciplinary history and registration of the

17 investment adviser and persons associated with

18 the investment adviser, and

19 ‘‘(F) conflicts of interest which could rea20 sonably be expected to impair the rendering of

21 disinterested advice.

22 ‘‘(3) PROMINENT DISCLOSURES.—Such docu23 ment shall also prominently disclose—

24 ‘‘(A) that—
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1 ‘‘(i) the registered person receives or

2 may receive, directly or indirectly, sales

3 commissions or other fees in connection

4 with a purchase or sale effected on behalf

5 of a client; or

6 ‘‘(ii) the registered person will not re7 ceive, directly or indirectly, any sales com8 mission or other fees in connection with

9 such purchase or sale, but the client may

10 be charged a sales commission or other fee

11 by another person in connection with such

12 purchase or sale; and

13 ‘‘(B) that remedies may be available to the

14 client with respect to disputes arising out of the

15 advisory relationship.

16 ‘‘(4) DEFINITION.—The Commission shall de17 fine ‘associated person providing significant invest18 ment advisory services to the client’ by rule for pur19 poses of this subsection.

20 ‘‘(c) TRANSACTION REPORTS.—

21 ‘‘(1) INITIAL DISCLOSURE.—Before a purchase

22 or sale is effected on behalf of any client, each reg23 istered investment adviser shall, in accordance with

24 rules prescribed by the Commission, disclose to the

25 client the total amount of commissions, fees, or
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1 other charges that may reasonably be expected to be

2 charged in connection with the transaction (or, in

3 the case of payments from third parties, that a pay4 ment will be received) and that the adviser or a re5 lated person will receive a portion of the commission,

6 fee, charge, or payment. Such initial disclosure shall

7 be in writing if the purchase or sale was rec8 ommended in writing.

9 ‘‘(2) CONFIRMATION.—After a purchase or sale

10 is effected, each registered investment adviser shall

11 transmit to each client a written statement that dis12 closes the amount of commissions, fees, or other

13 charges charged in connection with the transaction

14 (or, in the case of payments from third parties, that

15 a payment has been or will be received). Such writ16 ten statement shall be in such form and contain

17 such information, and be provided in accordance

18 with such rules, as the Commission shall prescribe.

19 Such rules shall, to the extent consistent with the

20 protection of investors, permit delivery of a con21 firmation statement of a broker or a dealer that in22 cludes information that meets the requirements of

23 this subsection (and the rules adopted thereunder)

24 in order to satisfy such requirements.
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1 ‘‘(3) WAIVER.—The Commission may, by rule,

2 permit an investment adviser to omit disclosure re3 quired by this subsection with the knowing written

4 consent of the client.

5 ‘‘(4) EXCEPTIONS.—This subsection shall not

6 apply—

7 ‘‘(A) with respect to any purchase or sale

8 for which the registered person, and any person

9 associated or under common control with the

10 registered person, will not receive any portion of

11 the amount charged or deducted in connection

12 with the purchase or sale, and will not receive

13 any payment from a third party required to be

14 disclosed under paragraph (1);

15 ‘‘(B) with respect to accounts for which

16 the person is authorized to exercise investment

17 discretion; or

18 ‘‘(C) with respect to any account for which

19 the person is not acting as an investment ad20 viser.

21 ‘‘(5) SPECIAL RULE.—The provisions of this

22 subsection shall also apply to persons associated

23 with an investment adviser effecting transactions for

24 advisory clients through a broker or dealer with

25 which the person is associated.
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1 ‘‘(d) PERIODIC REPORTS.—

2 ‘‘(1) IN GENERAL.—Each registered investment

3 adviser shall periodically provide to each client a

4 written statement of—

5 ‘‘(A) all commissions, fees, or other

6 charges paid by the client during the period for

7 services provided by the registered person and

8 any person associated or under common control

9 with the registered person;

10 ‘‘(B) all compensation directly or indirectly

11 received during the period by the registered per12 son, or any person associated or under common

13 control with the registered person, from any

14 third party with respect to any recommended

15 transaction;

16 ‘‘(C) in the case of a client account for

17 which the adviser provides investment super18 visory services, all securities positions held in

19 the account at the beginning and at the end of

20 the period; and

21 ‘‘(D) such other matters as the Commis22 sion shall prescribe.

23 ‘‘(2) COMMISSION RULES.—The Commission

24 shall prescribe by rule the format of the statement

25 and timing of its delivery. Such rule shall require
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1 that the format and timing of delivery be designed

2 to present the required information in a manner that

3 readily permits clients to compare the costs charged

4 by the investment adviser with the costs charged by

5 other advisers. In adopting such rule, the Commis6 sion shall require an investment adviser whose cli7 ents purchase or sell investment products through

8 persons other than such adviser, or persons associ9 ated or under common control with such adviser, to

10 disclose to its clients that such information concern11 ing costs charged does not include commissions or

12 other fees paid in connection with such purchases or

13 sales. Such rule shall, to the extent consistent with

14 the protection of investors, permit delivery of a re15 port of a broker or dealer that includes information

16 that meets the requirements of this subsection (and

17 the rules adopted thereunder) in order to satisfy

18 such requirements.

19 ‘‘(3) WAIVER.—The Commission may, by rule,

20 permit an investment adviser to provide the state21 ment required by paragraph (1) no more frequently

22 than annually if the client knowingly waives, in writ23 ing, the right to obtain such statement more fre24 quently than annually.
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1 ‘‘(4) EXCEPTION.—This subsection shall not

2 apply with respect to any account for which the per3 son is not acting as an investment adviser.

4 ‘‘(e) FACILITIES FOR FILING RECORDS AND RE5 PORTS.—The Commission, by rule, may require any in6 vestment adviser—

7 ‘‘(1) to file with the Commission any fee, appli8 cation, report, or notice required by this title or by

9 the rules issued under this title through any person

10 designated by the Commission for that purpose; and

11 ‘‘(2) to pay the reasonable costs associated with

12 such filing.’’.

13 (b) RULEMAKING REQUIRED.—The Commission shall

14 prescribe rules for purposes of subsections (b), (c), and

15 (d) of section 204 of the Investment Advisers Act of 1940

16 (as added by subsection (a) of this section) within one year

17 after the date of enactment of this Act.

18 SEC. 7. BOND REQUIREMENT.

19 Section 208 of the Investment Advisers Act of 1940

20 (15 U.S.C. 80b–8) is amended by adding at the end the

21 following:

22 ‘‘(e) BOND REQUIREMENT.—

23 ‘‘(1) IN GENERAL.—The Commission shall, by

24 rules for the protection of investors, require that any
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1 investment adviser registered under section 203

2 who—

3 ‘‘(A) is authorized to exercise investment

4 discretion, as defined in section 3(a)(35) of the

5 Securities Exchange Act of 1934, with respect

6 to an account,

7 ‘‘(B) has access to the securities or funds

8 of a client, or

9 ‘‘(C) is an investment adviser of an invest10 ment company, as defined in section 2(a)(20) of

11 the Investment Company Act of 1940,

12 shall obtain a bond from a reputable fidelity insur13 ance company against larceny and embezzlement in

14 such reasonable amounts and covering such officers,

15 partners, directors, and employees of the investment

16 adviser as the Commission may prescribe.

17 ‘‘(2) CONSIDERATIONS IN RULEMAKING.—In

18 implementing paragraph (1), the Commission shall

19 consider—

20 ‘‘(A) the degree of risk to client assets that

21 is involved;

22 ‘‘(B) the cost and availability of fidelity

23 bonds;

24 ‘‘(C) existing fidelity bonding require25 ments; and
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1 ‘‘(D) any alternative means to protect cli2 ent assets.

3 ‘‘(3) EXEMPTION AUTHORITY.—The Commis4 sion by rule may exempt any person or class of per5 sons, under such terms and conditions and for such

6 periods as the Commission shall provide in such

7 rule, from the requirements of this subsection and

8 the rules thereunder.

9 SEC. 8. DISQUALIFYING CONDUCT.

10 (a) AMENDMENT.—Section 203(e) of the Investment

11 Advisers Act of 1940 (15 U.S.C. 80b–3(e)) is amended—

12 (1) by redesignating paragraphs (3) through

13 (7) as paragraphs (4) through (8); and

14 (2) by inserting after paragraph (2) the follow15 ing new paragraph:

16 ‘‘(3) has been convicted within ten years pre17 ceding the filing of any application for registration

18 or at any time thereafter of any crime that is pun19 ishable by imprisonment for one or more years and

20 that is not described in paragraph (2) of this sub21 section or of a substantially equivalent crime by a

22 foreign court of competent jurisdiction.’’.

23 (b) CONFORMING AMENDMENTS.—Section 203 of

24 such Act is further amended—
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1 (1) in subsection (e)(6) (as redesignated by

2 subsection (a) of this section, by striking ‘‘this para3 graph (5)’’ and inserting ‘‘this paragraph (6)’’;

4 (2) in subsection (f)—

5 (A) by striking ‘‘paragraph (1), (4), (5), or

6 (7)’’ and inserting ‘‘paragraph (1), (5), (6), or

7 (8)’’; and

8 (B) by striking ‘‘paragraph (3)’’ and in9 serting ‘‘paragraph (4)’’; and

10 (3) in subsection (i)(1)(D), by striking ‘‘section

11 203(e)(5) of this title’’ and inserting ‘‘subsection

12 (e)(6) of this section’’.

13 SEC. 9. CONFIDENTIALITY.

14 Section 208 of the Investment Advisers Act of 1940

15 (15 U.S.C. 80b–8), as amended by section 7, is further

16 amended by adding at the end the following new sub17 section:

18 ‘‘(f) DISCLOSURE OF CLIENT INFORMATION PROHIB19 ITED.—

20 ‘‘(1) ADVISER DISCLOSURE.—It shall be unlaw21 ful for any investment adviser to disclose any per22 sonally identifiable financial information with respect

23 to any client unless required by law to do so, or un24 less—
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1 ‘‘(A) the client has been adequately in2 formed of the proposed information disclosure,

3 in accordance with rules prescribed by the Com4 mission, and (i) has been afforded the oppor5 tunity, in accordance with such rules, to object

6 to the disclosure, and (ii) has not objected or

7 has affirmatively consented;

8 ‘‘(B) the information disclosed is necessary

9 and appropriate in order to establish an advi10 sory or brokerage account or to effect or at11 tempt to effect a transaction for the client;

12 ‘‘(C) the information (i) is requested by

13 representatives of the Commission, a State

14 agency whose primary assignment is the regula15 tion of the securities business, or a self-regu16 latory organization, or (ii) is requested by sub17 poena; or

18 ‘‘(D) the information is requested by the

19 client’s auditors or accountants.

20 ‘‘(2) SECONDARY DISCLOSURE.—It is unlawful

21 for any person to whom information is disclosed for

22 the purpose described in paragraph (1)(B) to use

23 such information for any purpose other than the ef24 fectuation of the client’s transaction.’’.
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